Deception in High Places: A History of Bribery in Britain's Arms Trade

Deception in High Places

There is a companion website for this book – www.deceptioninhighplaces.com – on which you can find the text of some of the key documents cited in this book, as well as how to find out more about the arms trade and corruption.

Deception in High Places

A History of Bribery in Britain’s Arms Trade

Nicholas Gilby

First published 2014 by Pluto Press

345 Archway Road, London N6 5AA

www.plutobooks.com

Distributed in the United States of America exclusively by Palgrave Macmillan, a division of St. Martin’s Press LLC, 175 Fifth Avenue, New York, NY 10010

Copyright © Nicholas Gilby 2014

The right of Nicholas Gilby to be identified as the author of this work has been asserted by him in accordance with the Copyright, Designs and Patents Act 1988.

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Contents

List of Figures and Illustrations

Acknowledgements

Preface

Conclusion

Notes

Index

List of Figures and Illustrations

Figures

Illustrations

Acknowledgements

For long periods I thought this book would never be published. I would like to thank my family, friends and some (former) colleagues for their encouragement. To those who may have thought I was wasting my time, thank you for being too polite to say so.

I would like to thank Helen Angle, Graham Kelly and Dr Sally Malam for granting me a sabbatical in 2006 to start the research in earnest. I am also grateful to the unfailingly helpful staff of the institutions which have given me access to their collections: The National Archives, the Institution of Engineering and Technology, the British Library, Cambridge University Library and the Churchill Archives Centre at Churchill College, Cambridge. I am grateful to Dr Clare Chambers and Dr Phil Parvin for their generous hospitality in Cambridge. Peter Gardiner very kindly allowed me access to his private archive documenting BAE’s programme of benefits for Prince Turki bin Nasser, and Richard Brooks kindly gave me his documents about SIMEC.

Material from the Vickers Archive is produced by permission from the Vickers Archive held at the Cambridge University Library, and I am also grateful to the Syndics of Cambridge University Library for permitting me to publish quotations from the Vickers Archive. Material from the Caldecote Papers is produced by permission of the Institution of Engineering and Technology. The OECD Publishing Division and SEC Historical Society have also kindly given permission for me to quote from their documents.

It took me a long time to find a publisher who was prepared to publish this book. I am enormously grateful to David Castle and Anne Beech at Pluto Press for awarding me a contract, and for their patience during the contract negotiations. I greatly appreciate the patience and professionalism of all at Pluto who have helped the book through the publishing process. I would also like to thank my former agent, Leslie Gardiner, for her efforts on my behalf, and Laurie Flynn for introducing me to her.

The Trust for Research and Education on the Arms Trade supported me financially during my sabbatical. It also paid for the illustrations, and, along with the Joseph Rowntree Charitable Trust, contributed to the cost of the libel check this book has undergone. The support of their trustees, and of Celia McKeon of Joseph Rowntree Charitable Trust, has been wonderful and indispensable. I am indebted to Henry McLaughlin of Campaign Against Arms Trade for his advice on funding applications.

I would like to thank Andrew Feinstein, Nick Hildyard, Dr Sue Hawley, Dr Anna Stavrianakis and Professor Mark Phythian for being so generous with their time and advice over the years. Andreas Cebulla kindly agreed to be a ‘lay’ reader of the draft manuscript.

I enjoyed hugely working with all those at Campaign Against Arms Trade who were involved in the ‘Control BAE’ campaign, which aimed to reopen the Serious Fraud Office’s investigation into the Al Yamamah arms deal. In particular, Mike Lewis and Symon Hill both did outstanding work. We were extremely fortunate to have a first-class team of lawyers representing us during the Judicial Review (winning a famous victory in the High Court) and the satellite litigation: Jamie Beagent and Richard Stein of Leigh Day & Co., Ben Jaffey of Blackstone Chambers, Lord Pannick, Anthony Peto QC, Dinah Rose QC and Philippe Sands QC.

During that time and since, I worked closely with a number of journalists, and would like to thank in particular Rob Evans and Peter Marshall for their support and encouragement.

Important parts of the story told in this book would have remained an official secret without my victory over the Foreign and Commonwealth Office in an Information Tribunal. I owe an enormous debt of thanks to Jamie Beagent and Rachel Logan for their assistance; Phil Michaels for his encouragement and feedback on my legal submissions; Carne Ross of Independent Diplomat, and the late Joe Roeber for agreeing to testify on my behalf. Most importantly, Tom Hickman of Blackstone Chambers was incredibly supportive and provided invaluable shrewd tactical advice. Khawar Qureshi QC very kindly agreed to represent me in the closed hearings as my ‘special advocate’. For legal advice on libel issues I am greatly indebted to Dr Glen Reynolds, and Tamsin Allen and Athalie Matthews of Bindmans.

Lastly, I would like to thank Ann Feltham and Ian Prichard of Campaign Against Arms Trade, both of whom have been outstandingly supportive of my work over very many years, and who have been a pleasure to work with.

Finally, any errors in the book are, of course, entirely my responsibility.

Preface

No area of the corruption story is as full of intrigue and shrouded in secrecy than international trade in arms and weapons systems.

So writes a co-founder of Transparency International, Frank Vogl, in his book Waging War on Corruption.¹ In this book you can peer behind the veil of secrecy and see the intrigues of the political elites of several countries, into what author and former South African politician Andrew Feinstein has called a ‘shadow world’. I will show you how bribery schemes run by British and American arms companies work.

What is bribery? The three international anti-corruption agreements – the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions, the UN Convention against Corruption, and the Council of Europe’s Criminal Law Convention on Corruption – define a bribe. This is an ‘undue advantage’, which may be of a monetary or non-monetary nature, tangible or intangible.² In this book I use the word ‘bribery’ to mean the passing, or the intention of passing, an undue advantage to a decision-maker, directly or indirectly, in return for the award of a commercial contract. However, whether bribery is illegal depends on the law at the time in the country of the bribe giver and the bribe receiver.

Corruption is not defined by these international agreements, as it manifests itself in a large number of ways.³ Transparency International defines it as ‘the abuse of entrusted power for private gain’,⁴ and this is what I mean by corruption. However, the word ‘entrusted’ is not always apt, for in many countries mentioned in this book, those abusing their power have not been ‘entrusted’ with it by the consent of their people.

Transparency International further distinguishes between ‘grand’, ‘petty’ and ‘political’ corruption. In this book I mostly describe ‘grand corruption’, in other words ‘acts committed at a high level of government that distort policies or the central functioning of the state, enabling leaders to benefit at the expense of the public good’. Typically, huge sums are involved.

Some behaviour can be characterised as corrupt, but is not necessarily illegal. As will become clear, most of the actions of British companies described in this book were not illegal under English law at the time. Further, many of those involved might not think of their own behaviour as ‘corrupt’. You can be the judge of that.

In 2010 one of Britain’s biggest companies, BAE Systems, was fined $400 million in America because its actions⁵ ‘impeded U.S. efforts to ensure international trade is free of corruption’. It remains one of the largest ever fines imposed on a company investigated for corruption anywhere. But what prompted the American investigation was the high profile failure of a British investigation of the company’s most important contract – Al Yamamah – Britain’s biggest ever arms deal. For in 2006 BAE’s customer – the Saudi Government – successfully pressurised the British Government into ending a major corruption investigation into the deal. In this book you can read the whole story.

It is a story that goes back 50 years, and involves dubious deals every step of the way. I will describe how British arms companies have tried to bribe to get contracts – sometimes successfully, sometimes not – not only in Saudi Arabia, but also in Lebanon, Iran, Kuwait, and other countries. Implicated in these bribery schemes are some of the most powerful people in these countries at the time.

The arms trade has been a significant part of international trade and relations between Governments for several centuries. Having expanded rapidly during the Cold War, declined afterwards,⁶ but revived after the 11 September 2001 terrorist attacks in America,⁷ it is currently worth tens of billions of pounds a year. Its importance is due to its role in enabling Governments to equip themselves for war cost-effectively, support allies and deter enemies, and in permitting the development of ever more technologically sophisticated weapons.⁸ However, since at least the time of the First World War, which prompted public concern about ‘merchants of death’,⁹ the international arms trade has been the subject of controversy. Today the legal and illegal international arms trade facilitates massacres and human rights abuses around the world. While the Russians supply tyrannies such as Assad’s Syria and Khamenei’s Iran, Britain has recently supplied Gaddafi’s Libya and the Americans Mubarak’s Egypt. The many legitimate reasons to be concerned about the international arms trade (its effects on security, human rights, development, and so on) recently found expression in the successful campaign to agree an Arms Trade Treaty at the UN.

Corruption has been particularly rife in the arms trade for decades. In his excellent book The Arms Bazaar, first published in 1977,¹⁰ Anthony Sampson explained why this was so 100 years ago:¹¹

The great majority of orders were from governments, where the decision could well depend on one or two individuals, whose support was therefore essential. The advantage of buying one warship or gun, as opposed to another, were often uncertain, and arguments could thus easily be swayed. The orders were often very large, so that a single decision was more critical for an arms company. And the sales were usually conducted in secrecy, for reasons of national security. Moreover as the commission increased, officials might well favour bigger orders, beyond the capacity or needs of their country, to ensure that their share would be greater.

This still holds true today. The late Joe Roeber, whose book, The Hidden Market: Corruption in the International Arms Trade was sadly never published, argued a few years ago¹² that the arms industry was ‘hard-wired’ for corruption, because the international arms market was over-supplied. Further, in many countries purchasing decisions are often made by an unaccountable political elite. Not only are different weapons systems difficult to compare, each contract is complex and contains unique requirements. As Roeber said, ‘an unknowable price can accommodate any amount of covert payments’.

Today, arms trade corruption still enriches the political elites in many countries. Indeed, for some, whose tenure at the top may be insecure or short, a big arms deal is the best chance they may ever have to get rich.

Arms trade corruption is, typically, grand corruption: a crime of the establishment, and that is what makes it an important issue.

The effects of grand corruption are profound. The UN Convention against Corruption argues the ‘illicit acquisition of personal wealth can be particularly damaging to democratic institutions, national economies and the rule of law’ and refers to ‘the seriousness of problems and threats posed by corruption to the stability and security of societies’. The grand corruption I describe in this book affects many countries such as developing African countries and the oil-rich states of the Middle East, but also democracies such as South Africa.

In this book I also describe how the Governments of Britain and America – two countries rightly known for their relatively high standards of integrity in public life and strong commitment to the rule of law – reacted to bribery schemes in arms deals over the last 50 years. Politicians and officials in Britain and America knew some arms companies paid bribes, and sometimes knew the details. When deciding what to do, they faced a range of competing considerations – stopping improper behaviour, securing lucrative exports, and maintaining good relations with foreign governments. They had only a limited ability to influence the behaviour of the bribe payers and receivers and usually every option carried a significant penalty. I want to explain the dilemmas decision-makers faced.

That corruption is common in international trade is widely accepted. But, paradoxically, there is little hard evidence in the public domain. Corruption is a secret conspiracy entered into by consenting adults and hence documents detailing it rarely become available. There are few open corporate archives. As secret conspiracies are difficult to uncover, there are few prosecutions. Further, bribe payers and receivers tend to be rich and/or powerful, and the fear of libel action can deter public discussion of specific cases. But, to understand how to stop corruption, we need to understand how bribery schemes work.

I do not argue that British and American companies are worse than those from other major exporting countries. The examples in this book focus on Britain and America for a number of reasons. Firstly, Britain and America are relatively open societies where historical and legal documents can be obtained quite easily. Secondly, both countries have been important participants in the international arms trade for many decades. Thirdly, I do not have the time, resources, or language skills to study the historical documents of other major arms trade participants such as Russia or France.

To write this book I have relied entirely on documents which are in the public domain. I have not stolen anyone’s secrets, nor do I have any ‘insider’ sources. Where, on occasion, the details of well publicised allegations are omitted, this is because I do not have access to the documents.

My main sources are the historical documents of the British Government, kept at The National Archives. The legal international arms trade is very heavily supervised by Governments, and Government officials tend to know more about the detail of arms deals than they do about international trade in other sectors. Much of their insider knowledge is preserved in Government documents.

I have also used a small number of collections of private papers. The papers of Lord Caldecote, who once directed the British Aircraft Corporation’s dealings in Saudi Arabia, are now available for public inspection at the Institution of Engineering and Technology in London. They throw considerable light on how what is now BAE won its first deals in Saudi Arabia in the 1960s. The Vickers Archive, maintained by Cambridge University Library, contains papers showing how Vickers went about trying to sell a submarine in Saudi Arabia during that decade. Lastly, some of the papers of Peter Gardiner, who ran BAE’s programme of benefits for the Saudi Prince who controlled the Al Yamamah deal, are available to inspect at the offices of Campaign Against Arms Trade in London.

I have also relied extensively on papers disclosed following legal proceedings. Firstly, the Judicial Review of the Serious Fraud Office’s decision to terminate its corruption investigation into BAE’s dealings in Saudi Arabia meant many important recent Government documents entered the public domain. Secondly, because many of the historical documents about the bribery around the Saudi Arabian National Guard deal (described in Chapter 3) and Geoffrey Edwards’s litigation against Associated Electrical Industries (described in Chapter 5) were withheld by the British Government, I used the Freedom of Information Act to obtain them. I met strong resistance from the Foreign and Commonwealth Office, who employed a leading QC and another barrister to put their case at an Information Tribunal, though I was unrepresented. The then Ambassador to Riyadh, William Patey, also gave evidence. I was very fortunate to prevail in this ground-breaking case,¹³ and as a result was able to obtain many more documents.

I have relied on four main sources about American arms deals and the advent of the Foreign Corrupt Practices Act. The first is a collection of historical documents made available on the internet by the Securities and Exchange Commission Historical Society (see www.sechistorical.org). The second is a collection of diplomatic cables made available on the internet by the National Archives and Records Administration (see www.aad.archives.gov/aad/series-description.jsp?s=4073&cat=all&bc=sl). The third are the documents published during the hearings of Senator Frank Church’s Committee in the mid 1970s. Lastly, I have also used publicly available documents from American legal proceedings.

Allow me to anticipate three criticisms of this book. Firstly, it is irrelevant to today’s world, because it is history. Secondly, that the book is unreliable, because it presents a partial picture, based on incomplete information. Thirdly, that the book is an over-simplified account of the events described.

Firstly, corruption in international trade has a basic character that is the same now as it ever was. Company A wishes to be awarded a contract by decision-maker B. Thus, in a successful bribery scheme Company A needs to transmit money or other benefits to decision-maker B. To be effective this transaction needs to be concealed. This is best done by an intermediary or chain of intermediaries receiving money or other benefits from Company A and passing them to decision-maker B (with the intermediaries pocketing some of the money as a recompense for their time and trouble). Though bribery schemes can be complex, they necessarily have this basic character. The unchanging dynamic of corruption in international trade means we can today still learn worthwhile lessons from historical examples.

Secondly, evidence about corruption is bound to be partial. Secret activities are naturally difficult to uncover and investigate, even for law enforcement agencies. Bribery schemes in international trade cross jurisdictions. Further, those involved frequently use shell companies in offshore jurisdictions, where often it is impossible for anyone to tell who really controls a company, to maintain secrecy. For example, the Serious Fraud Office’s investigation of BAE took six years to complete, and involved the investigation of entities in Switzerland and other offshore secrecy jurisdictions.

Evidence from corporate records is usually superior to Government records, particularly as corporate documents sometimes detail who the intended beneficiaries are. However, as we will see, often companies keep very poor or no records of corrupt transactions, to ensure they do not come to light.

The British Government declassifies a mass of historical documents every year, but this is not the full story. Firstly, not all Government records are preserved. Secondly, officials do not always record everything they know (for example, the diplomat who saw the list of ‘influential Saudis’ bribed by Geoffrey Edwards in the 1960s did not record their names). Lastly, almost no information from the Secret Intelligence Service (SIS) or the Government Communications Headquarters (GCHQ) is declassified.¹⁴ Officials were not, for the most part, directly involved in making corrupt payments, and much of what they recorded was hearsay. However, because of their access to senior executives and because the culture of Whitehall prizes accuracy, much of this information is likely to be very reliable.

It is only on some occasions I can prove money from Company A reached decision-maker B (on some occasions of course, a deal being negotiated was never finalised). However, this problem is also one encountered by law enforcement agencies, as well those who in the 1970s investigated the questionable practices of the Lockheed Aircraft Corporation in America and British Leyland in Britain. The report of Lockheed’s Special Review Committee explains eloquently:¹⁵

The most vexing and frustrating problem with which the Committee and its lawyers and accountants have had to wrestle is how much of the commissions paid in respect of sales in any country was kept by the consultant, and how much, if any, was passed along as improper payments to government or customer officials.

I agree with their conclusion:¹⁶ ‘The Committee believes that in many instances the most significant aspect of a particular payment was its intended disposition in Lockheed’s eyes – rather than its actual ultimate destination.’

I cannot be sure I have uncovered all the available evidence of arms trade corruption in British Government files since the mid 1960s because of the constraints on my time in the past nine years. Further research may be able to paint a fuller picture. I have focused on countries which were Britain’s major arms customers, and/or where there was good reason to believe corruption was likely.

For almost all the examples in this book, it is highly unlikely any new evidence about them will ever emerge. If you believe that one should not conclude behaviour is corrupt based on partial information, that is tantamount to saying corruption does not exist. Moreover, it is self-evidently reasonable to draw conclusions about the past based on incomplete information. That is what history is.

Lastly, the book is not a full account of the events described. That is partly because the publisher asked me to write 70,000 words, and partly because I wanted the book to remain accessible to the general reader. However, I have taken great care to state the essential facts, and so the account is not, I believe, misleading.

In the interests of transparency, I have retained the original drafting and spelling in the documents wherever possible. I have eschewed the use of acronyms, where possible, to make life easier for the reader. Thus I use ‘Britain’ to refer to the UK, and ‘America’ to refer to the USA. Lastly, to give the reader a better sense of the size of the sums involved in the deals described in the book, I have calculated what they would be worth in ‘today’s money’ using GDP deflators published by the British and American Governments (downloaded on 23 June 2013 and 24 June 2013 respectively).

The book is structured broadly chronologically, but also thematically to maintain coherence, so that on occasion I introduce a new part of the story by going back into the past, or by recapping.

The book begins by introducing one common thread that runs through it – Britain’s arms trade with Saudi Arabia – a remarkable (and corrupt) relationship that has endured unbroken for around 50 years. Chapter 2 looks at the British Government’s involvement in bribery schemes, and official attitudes, during the 1960s and 1970s. I then describe in Chapters 3 and 4 the bribery schemes used by British arms companies in the 1970s in the two countries that were Britain’s biggest customers – Saudi Arabia and Iran.

From this point on I compare developments in Britain and America. In Chapter 5 I compare the behaviour of the British companies with two of America’s largest arms companies – Lockheed and the Northrop Corporation. In particular I describe two arms trade corruption scandals – one in America and one in Britain – and explain why they led to new anti-corruption laws in America but not in Britain. Chapters 6 and 7 look at British Government efforts – firstly at home, secondly on the international stage – to avoid taking effective action